KRUGER INSIGHTS WEDNESDAY, FEBRUARY 05, 2014

By: Joel Kruger

Picking Spots - I had warned that following a nice bout of risk liquidation, there was a very strong possibility that we would get a bit of a bounce on Tuesday. This is exactly how it played out and as per my recommendation, the sidelines were the best place to be for the day. Having said that, with NZD/USD rallying sharply on the day, I started to take my shots late Tuesday. I initially sold 0.8220 and with the market showing no follow through ahead of the Kiwi employment data, I exited the position at cost. The data came out better than expected and the market jumped up just over 0.8250 before pulling back. I was watching the rally closely and took the opportunity to sell again, this time at 0.8246. At the time, hourly studies were well overbought, and the market was also testing a key 78.6% fib retrace off of a recent high-low move. Given my more medium-term bearish bias here, I also really liked the idea of jumping back in. Fundamentally, despite the solid data, there is too much going on outside of New Zealand at the moment for the price action in the currency to be so heavily weighted to the domestic front. The macro picture is changing, and with the other commodity bloc and emerging market currencies under pressure, we should expect the same from the New Zealand Dollar.

Erring On The Side Of Caution - At the same time, we also need to be careful, and prepared to exit if the trade is not working out. It is still unclear at this point whether this latest bout of short-term consolidation in markets is over, ahead of the next big selloff in risk assets, or if we are going to see more consolidation, resulting in a bit more upside in risk assets (risk currencies), before that bearish continuation. I have placed my stop at cost on the 0.8246 NZD/USD short and we will see how it plays out. My bias is clearly bearish risk, but my biggest concern is that emerging market currencies have been sold so aggressively of late that they could be looking attractive to some, which could inspire a rally. And if we see a rally here, it would probably influence other markets like USD/JPY, EUR/CHF, NZD/USD and US equities (higher). Again, I don't believe these emerging market currencies have much upside, but technically, it wouldn't be inconceivable to see a bit more of a rally before they once again head lower. So this is what is keeping me ultra cautious at the moment. Whatever the case, I will continue to look for opportunities to be fading currencies and buying US Dollars, particularly against the non-major FX markets. Keep an eye on the hourly movements in USD/JPY, EUR/CHF and US equities today. These markets will probably give the best indication of what lies ahead.